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TATA STEEL LTD: Tata
Steel Limited was established by Mr. Jamsetji Nusserwanji Tata in 1907. It was
formerly known as The Tata Iron and Steel Company Limited and changed its name
to Tata Steel Limited in 2005. Tata Steel Limited is a diversified steel
producer with an annual crude steel capacity of over 26.5 million tonnes per
annum. It has a global presence in 50 markets and manufacturing operations in
26 countries. The company has over 80,000 employees across five continents and
is among Fortune 500 Company. Tata Steel’s principals products include flat
rolled products of Non-Alloy Steel of a width of 600 millimeter and hot rolled
coils of thickness 1.66 millimeter; tubes/pipes of circular section with outer
diameter up to 114.3 millimeter, not cold rolled & flat rolled products of iron
or non-alloy steel of width of 600 millimeter or more, cold rolled
(cold-reduced), not clad, plated or coated of a thickness of 0.5 millimeter or
more but less than 3 millimeter. Company also provides steel for different
industries, which include construction, automotive, aerospace, consumer goods,
materials handling, energy and power, rail, engineering, ship-building,
packaging, and security and defense. Tata Steel also manufactures and processes
steel, which includes hot-rolled coil through to high-gloss, pre-painted
perforated blanks, wire rod and wire, sections, plate, bearings and tubes.
Its major branded products are Tata Steelium, Tata Shaktee, Tata Tiscon,
Tata Pipes, Tata Bearing and Tata Agrico. In 20 October 2009, TATA STEEL won
bid to acquire Anglo – Dutch steelmaker CORUS (A company formed through merger
of British Steel and Konnklijke Hoogovens in October 1999) at $7.6 billion.
On January 30, 2007, Tata Steel purchased a 100 % stake in the Corus Group at
608 pence per share in an all cash deal, totally valued at US$ 12.04 Billion.
The deal is the largest Indian takeover of a foreign company and made Tata
Steel the world's fifth-largest steel group. In September 2010, Corus name was
changed into TATA Steel Europe. In September 27th 2011, Tata Steel merged
Centennial Steel Company Ltd with itself. In July 2012, the company sold its
stake in HKS Scrap Metals bv to Euro Scrap Alliance. TATA STEEL’s production
facilities include those in India, UK, Netherlands, Thailand, Singapore, China
and Australia. TATA STEEL is locally compared with SAIL, JSW Steel, Jindal
Steel and Power, VISA Steel and Rashtriya Ispat Nigam and globally with ArcelorMittal
SA of Luxembourg, Hebei Iron and Steel of China, Wuhan Iron & Steel Co Ltd
of China, POSCO of South Korea, Nippon Metal Industries Co.,Ltd of Japan, JFE
Holdings Incorporated (Japan) & Angang Steel Company Ltd (Hong Kong),
Sumitomo Metal Industries Ltd of Japan, Severstal of Russia and Hyundai Steel
Company of South Korea.

Investment Rationale:

TATA
STEEL LTD will amalgamate its listed subsidiary Tata Metaliks (TML) and its
100% subsidiary Tata Metaliks Kubota Pipes Ltd – a subsidiary of TML with itself. Tata Steel holds 50.09% stake in TML and shares held by them in TML will be
extinguished and the public shareholders of TML will be issued shares of Tata
Steel in the ratio of 4 equity shares of Rs. 10 each of Tata Steel for every 29
equity shares of Rs.10 each held in Tata Metaliks Ltd. This merger will help
Tata steel in envisaging synergies through aligning the activities of single
value chain with one legal entity. TML through constant up-gradation in
technology and setting up its second mini blast furnace has enhanced its
capacity of Pig iron from 90,000 tpa in 2004 to 3,50,000 tpa today. TML has
recently commissioned a 40 m2 sinter plant at Kharagpur site to produce
about 0.4 mtpa of sinter at a capex of Rs. 100 Cr. TML products are sold to
foundries all over India. As far as Tata Metaliks Kubota Pipes ltd is concern it is a 100%
unlisted subsidiary of Tata Metaliks Ltd and was established in 2007 as a JV
between TML, Kubota (Japan) and Metal One (Japan) for producing ductile iron
pipes used for water distribution mainly used by the infrastructure sector. Tata
Steel Ltd has amalgamated Kalimati Investment Company Limited (KICL) with
itself effective from January 1, 2013 after the requisite approvals and sanction
being received including approvals and orders under Sections 391 - 394 of the
Companies Act, 1956. Tata Steel India has recently undergone 2.9 mtpa brownfield expansion at Jamshedpur.
It is planning 6 mtpa green-field expansion in Odisha in two phases of 3 mtpa
each. It also has 80% stake in the DSO (Direct shipping ore) project in Canada, balance 20% stake is owned by New Millennium Iron Corporation (NML). Tata Steel has 27.4% in NML. Cumulatively, the capex of all the three projects is
expected to be around Rs. 44,100 Cr. Tata Steel
Europe has completed the BF 4 at Port Talbot after spending US$ 22.3 Cr. Tata
Steel realized about 96 million tonnes in consideration during the first nine
months ended December through the sale of or divestment of small-sized
businesses to reduce complexity across multiple jurisdiction as part of the on-going
portfolio management work at Tata Steel Europe. TATA Steel has recently issued SGD 300 million 4.95% Senior Unsecured Notes due for 2023. These notes are guaranteed by TATA Steel Ltd. These notes represent unsecure obligation of the isuer and will rank pari passu with all its existing future unsecured obligations. These notes will be listed on the Singapore Stock Exchange.

Outlook and
Valuation:

Global steel capacity utilisation remains at 77%
implies significant over capacity. Moreover, Sovereign debt issues and
austerity measures in the Eurozone are hurting consumer sentiment and steel demand
which remains the key enablers for improvement in the current scenario. While
Indian economy and steel demand continues to grow, albeit at a slower pace,
sentiment in China is improving on account of Government spending on
infrastructure projects. However, a sceptical view on the demand outlook for
steel products remains in near term. In Mozambique, Tata Steel is in the
process of developing a coking coal mine and an iron ore mine in Canada to
enhance integration levels of the company. The total capex remaining for the
Mozambique project is US$100mn–150mn, while the Canadian project will involve capex
of CAD350mn. These backward integration projects at Mozambique and Canada will boost
the company's earnings beginning FY14. The Orissa project will benefit from captive iron ore,
lower logistics cost and efficiencies of a modern plant. A ROE's of 15-20% for
the project is expected. Tata steels’s long term strategy of building high
margin 16 mtpa steel capacity in India is a big positive. The stock trades at 6.8 x FY14E EV/EBITDA valuation. After
the recent correction in the stock over the last couple of months, Tata Steel is
trading at a discount to its peers. The Indian business of Tata Steel is at a 5
x EV/EBITDA multiple at Rs. 476.88/share and the European business at 5 x at Rs.
252.6/share, is justified as the Indian operation is self-sufficient in terms
of raw materials (100 % iron ore and 50 % coking) and deserves a decent premium
vis-à-vis Corus, which is not self-sufficient. Stock continues to offer an attractive opportunity
given the distress valuations of European operations &
the strong domestic operations and increased raw material self-sufficiency from
current 33 % to 50 % in iron ore and 18 %
to 23 % in coking coal (by FY13 end). At the current market price of Rs. 318.70, the stock is
trading at a PE of 8.70 x FY14E and 7.27 x FY15E respectively. The company can
post Earnings per share (EPS) of Rs. 36.60 in FY14E and Rs. 43.80 in FY15E. One
can buy TATA STEEL with a target price of Rs. 346.63 for Medium to Long term
investment.

SOTP valuation (FY2013E)

BUSINESS SUBSIDIARY

Value per Share(₹)

Core Business

476.88

Tata Steel Europe (5 x FY13E EV/EBITDA)

252.60

Jamshedpur 3mpta plant & Other projects.

178.00

Value of Other Subsidiaries

93.20

TOTAL VALUE

1000.68

Less: Debt

654.05

TOTAL VALUE PER SHARE

346.63

KEY FINANCIALS

FY12

FY13E

FY14E

FY15E

SALES (₹Crs)

132899.70

126382.70

153830.50

157542.30

NET PROFIT (₹ Cr)

2,027.90

2,346.80

3,556.60

4,250.50

EPS (₹)

20.90

24.20

36.60

43.80

PE (x)

18.20

14.20

10.40

8.70

P/BV (x)

0.90

0.90

0.90

0.80

EV/EBITDA (x)

7.00

8.10

6.80

5.70

ROE (%)

5.20

0.20

5.00

9.60

ROCE (%)

4.60

2.50

6.00

6.70

I would buy TATA STEEL LTD with a price target of ₹ 346.63 for Medium to Long term target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or ₹ 293.20 on every purchase. (Why Strict stop loss of 8 % ?) -Click Here

*As the author of this blog I disclose that I do hold TATA STEEL LTD in my investment portfolio.

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